Friday, October 26, 2007

Dow Chemical's Earnings Call Notes: Eye Opening

Some very interesting things were discussed on the earnings call Thursday that, if you were disappointed over the earnings release earlier in the day, would have fixed that.

Dow Chemical (DOW) still is tied to its cyclical commodities business to a point and its transformation has been centered on getting away from that. Estimates for the next "trough" in the commodity business put EPS between $2 and $3 a share. CEO Liveris said on the call that "our confidence is increasing" that Dow would be at the top of that range and when pressed about beating the $3 ($3.50 was the number thrown out), they were of course non-committal but at the same time did nothing to dispel that thought. As many investors know, it is not what is said but what is not said at times that is more meaningful. This is important because it now means that when Dow's earnings are at their lowest shares will then trade for about 14 times earnings at today's prices vs the nearly 28 times that was estimated earlier in the year. The importance of this cannot be emphasized enough as it then means the "peak" will then be that much better.

To date Dow has repurchased 25 million shares or 2.6% of outstanding shares. Not insignificant but also not an impressive amount. The dividend was increased 12% in June and sits at 3.8% which is very nice and very safe.

Cash flow remains strong and this is a function of the JV strategy that is a self funding one, meaning the revenues from various ventures fund that costs of current and additional ones.

JV's while off for the quarter have produced earnings to date of about $825 million vs $700 million at this time last year.

The constant "transformational event" chatter was addressed. Regarding the postponed meeting in November Liveris said, "when we do decide to have a meeting, you'll hear alot from us". There was a very interesting back and forth with an analyst that went like this:

Frank Mitsch - BB&T

Now Andrew, a couple of weeks ago we saw major volatility in the share price surrounding the decision to postpone your analyst meeting. Could you expand upon the reasons why you decided to do that?

Andrew Liveris

Well, just like the Red Sox are in the World Series again Frank -- I assume that’s why you’re congratulating Kathy -- we’re playing our own World Series here and lots of people are wondering what inning we’re in. I would tell you that the Dow Chemical Company has got lots of opportunities out there.

To Dave’s question, we just don’t want to have a premature event. We don’t want to have a meeting for the sake of having a meeting. When we have a meeting, we want to be able to tell you a lot about where we are on certain of our transactions. That doesn’t mean it’s an imminent one, it just means that with a lot of things going on, it just says that we didn’t think the timing was right.

We gave some notice when we first put the data out there, we said tentative. Then we were pretty much toying with the idea of December and we said, well, let’s just wait a little bit. I would tell you that we are very active and will stay very active. But when we have a meeting, you’ll hear a lot from us.

Frank Mitsch - BB&T

It almost begs the question on how imminent the transactions will be because it does appear that you are targeting early next year. So I think some of the speculation is probably not all that off base in terms of an imminent transaction. With that said, assuming that you’re the buyer, how much dilution and for how long would you tolerate any significant transformational transaction?

Andrew Liveris

I guess I’ll give you two quick answers. One, no comment on accretion or dilution other than our whole M&A discipline is around accretion and doing the right deals for the right reasons, and we’ve been very consistent on that. Maybe the other answer, if I can be so bold, talk to me when the Red Sox win the World Series.

Frank Mitsch - BB&T

So we’re going to have to wait another 84 years?

Geoffery Merszei

Frank, let me just add on to what Andrew just said. We have been having regular dialogue with the sell side, as well as with the buy side analysts, and we’ve been listening to all of you. The bottom line is that everyone basically agrees that when we have a meeting like this, we shouldn’t have a meeting just because it’s on the calendar every three years, but we should have it at a time when it makes a lot of sense in terms of having a fruitful dialogue and to make sure that it’s an efficient use of everyone’s time. So we have been listening, and that is really truly the driver for having it at the right time.

Frank Mitsch - BB&T

Are we looking at some time in the latter part of the first quarter?

Andrew Liveris

In terms of the meeting? Is that the question?

Frank Mitsch - BB&T


Andrew Liveris

Probably. I would say it that way, but we will not give you a firm date. But trust us, we’re listening, as Geoffery said. Our buy side, our sell side, all of you matter to us and we’re going to really time it so it’s the right time. I don’t want to be waiting a year for it, how’s that? I’ll give you an out of bound.

Could he say more without saying anything?

Liveris did say of a potential "partner", "Whatever a new entity looks like, let's call it a joint venture, will have to be a growth company...not just a consolidation play, not just an exit strategy, not a leverage play but a growth company. Secondly, it has to preserve Dow Chemical's integration, particularly in its performance plastics and chemicals businesses, and provide a petrochemical "cracker" that can support the company's broad portfolio."

He finished by saying, "A strategic almost certainly going to have access to feedstocks somewhere in the world, notably the Middle East, but not just there," Liveris said. "They are going to be able to provide us those feedstocks on an ongoing basis, not just on one project."

One can almost only determine that something is in the works and it will be quit big. It is not a question of me reading what I want to here into the comments either because if you have read my commentary of Dow, a huge event is not something I have been stumping for.

Liveris did say to the analyst in the "transformational event discussion: "talk to me when the Red Sox win the World Series". Okay Andrew, I will be in touch next week.

Bottom line is Dow is a long term ValuePlay, that means that there will be quarters like this but as long as the long term focus and fundamentals remain intact, we look past it, pick up more shares if they drop and hold on.

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